Long-Run Growth

Definition

Long-run growth refers to the sustained increase in a country's productive capacity and output over an extended period of time, typically measured in decades. It is a central concept in macroeconomics, as it describes the factors that drive economic progress and improvements in living standards in the long term.

5 Must Know Facts For Your Next Test

1. Long-run growth is primarily driven by increases in the quantity and quality of capital and labor inputs, as well as improvements in technology and productivity.
2. The Solow growth model suggests that in the long run, an economy will converge to a steady-state level of output per worker, determined by the rates of saving, population growth, and technological progress.
3. Total factor productivity, which captures the efficiency of an economy in combining its inputs, is a key driver of long-run growth and can be influenced by factors such as education, innovation, and institutions.
4. Policies that promote investment, education, and innovation are often seen as important for fostering long-run economic growth.
5. The balance between Keynesian and neoclassical models in understanding long-run growth involves considering the roles of aggregate demand, supply-side factors, and the interaction between the two.

Review Questions

• Explain how the Solow growth model describes the determinants of long-run economic growth.
  • The Solow growth model suggests that long-run economic growth is determined by the rates of saving, population growth, and technological progress. In the model, an economy will converge to a steady-state level of output per worker, where the growth rate of output per worker is determined by the rate of technological progress. The model emphasizes the importance of capital accumulation and improvements in productivity, rather than just increases in labor, as key drivers of long-run growth.
• Describe the role of total factor productivity in the context of long-run growth.
  • Total factor productivity (TFP) is a crucial component of long-run economic growth, as it captures the efficiency with which an economy combines its inputs of capital and labor to produce output. Improvements in TFP, driven by factors such as technological progress, innovation, and institutional quality, can lead to sustained increases in an economy's productive capacity and output over time. Understanding the determinants of TFP growth is therefore central to understanding the drivers of long-run economic progress.
• Discuss how the balance between Keynesian and neoclassical models is important for understanding long-run growth.
  • The balance between Keynesian and neoclassical models is crucial for understanding long-run economic growth, as it involves considering both the role of aggregate demand and supply-side factors. Keynesian models emphasize the importance of policies that stimulate aggregate demand, such as fiscal and monetary policies, in promoting growth. Neoclassical models, on the other hand, focus on the supply-side determinants of growth, such as capital accumulation, technological progress, and productivity improvements. Reconciling these two perspectives is necessary for developing a comprehensive understanding of the complex dynamics that drive long-run economic growth.

Related terms

Aggregate Production Function:

A mathematical function that relates the total output of an economy to the inputs of capital, labor, and technology or productivity.

Total Factor Productivity:

A measure of the efficiency with which an economy combines its inputs of capital and labor to produce output, reflecting technological progress and other factors.

Solow Growth Model:

An economic model that explains long-run growth as the result of increases in the quantity and quality of inputs (capital and labor) as well as technological progress.